Global ABS Conference Recap – Day 1

June 05, 2018 06:22 PM Eastern Daylight Time

BARCELONA--(BUSINESS WIRE)--Macro volatility continued into the early part of this week, as the new
Italian government laid out its euro-skeptic policy agenda and a new
Spanish government, controlled by the Socialist Party, took power over
the weekend. Against this backdrop of elevated political uncertainty
across the Eurozone, the Global ABS Conference kicked off on Tuesday
with a post-crisis record of around 3,700 attendees in Barcelona.

Regulation and policy took center stage on day 1, with eight out of 17
panels devoted to topics ranging from the Simple, Transparent,
Standardised (STS) securitisation framework to the impact of less
accommodative central bank policy on the structured finance market
(Figure 1). Unlike in the U.S., where the implementation of Dodd-Frank
era rules has mostly been completed and are now being rolled back under
the Trump administration; a number of regulations affecting the
securitisation market are just starting to be rolled out in Europe,
putting it at the front of most conference goer’s minds.

Below we give a quick recap of some of today’s panel topics.

A Brief History of Recent Regulatory
Developments

The conference kicked off with a panel discussion of the various
regulatory developments effecting the structured finance market. The STS
regulation took up the majority of the panel’s time, as its
implementation appears to be front of mind for most European investors.
It was noted that there are around 80 individual requirements that must
me complied with for a securitisation to be STS eligible, but many of
the requirements are vague and up to interpretation, particularly a
requirement that all assets in a securitisation must be homogeneous. It
was also noted by the panel that for a securitisation to be STS
compliant, it cannot contain non-EU assets. As a result, most U.S.
issuers and investors aren’t paying much attention to this new
regulation.

The STS framework is not the only regulatory development that market
participants should pay attention to, according to panelists. The U.S.
Appeal Court’s ruling exempting CLOs from the risk-retention rule, and
what this could mean for other securitised asset classes, was also
discussed. It was generally agreed by the panelists that it remains to
be seen whether the court’s ruling can be applied to other structured
asset classes and if it can, whether investors will be willing to buy
bonds from issuers that don’t retain any of the risk.

The panel concluded by discussing what impact the phase out of LIBOR
will have on the market for ﬂoating-rate debt. The panelists believed
that regulators and industry trade associations are highly focused on
facilitating an orderly transition away from LIBOR to an alternative
rate by 2021. However, until the market agrees on a suitable replacement
for LIBOR, issuers should incorporate provisions that provide
flexibility in switching to an alternative benchmark (see LIBOR
No More, published November 2017).

Esoteric Investment Overview

The panel began with a seemingly simple question: what is an esoteric
asset? The answer depends on whom is asked, but there was broad
agreement among the panelists that esoteric assets are generally assets
that are less familiar to investors. Some examples included
transportation assets, marketplace lending, and renewable energy
receivables. Next, the panelists compared deals backed by esoteric
assets in both the European and U.S. markets, and it was noted that
there has been less breadth of deals in Europe, with those that have
come to market generally anchored by familiar asset classes with slight
structural tweaks. The panelists then discussed regulatory matters,
particularly the jurisdictional aspect in Europe that can make
aggregating assets more complicated. However, it was noted that the
European Union is seeking to unify standards across jurisdictions. The
panel ended with a discussion on where investors can find yield and what
new asset classes and structures investors can expect to see in the
future, with renewable assets and the whole loan market mentioned,
respectively.

An Introduction to STS/The STS User Manual for
Investors and Issuers

During the two panels , panelists provided an overview the STS
regulatory framework, as well as its potential impact on the structured
finance market. The panelists walked through how the European Council
adopted the STS securitisation regulation in late 2017. Under the new
regulation, a securitisation will qualify as STS if certain conditions
are met, at which point lower capital requirements would apply for banks
under the Capital Requirements Regulation (CRR). However, the panelists
noted that the European Council has been slow to adopt similar capital
relief measures for insurance companies holding STS compliant debt under
the Solvency II capital regime, creating uncertainty for insurance
investors.

Although there remains a lack of clarity on the exact criteria for an
STS securitisation ahead of its January 2019 implementation, the
European Banking Authority (EBA) and European Securities and Market
Authority (ESMA) are currently drafting Regulatory Technical Standards
with more details to come later this year. In general, the panelists
viewed the STS framework as a positive for the European structured
finance market, mainly because it signals an official policy and
regulatory “buy-in” and should bring securitisation capital charges
somewhat more in line with those applied to covered and corporate bonds.

Fundamentals of Residential Mortgage Finance

As part of the conference’s introductory “101 Series,” the panel began
with a conversation regarding the two primary RMBS structures: static
and revolving, with the former being the dominant structure in Europe.
Next, the panelists discussed the emergence of specialty lenders since
the Financial Crisis, noting the increased presence of private equity
shops, which are incentivized to enter the market by the prospect of
higher returns, particularly in the non-performing market. The
conversation then turned to the five fundaments of residential mortgage
finance from KBRA’s rating agency perspective. The panelists then
discussed the benefits of RMBS versus covered bonds, with RMBS generally
seen as a more efficient vehicle, despite being more heavily regulated.
The panel concluded with a discussion comparing and contrasting RMBS in
the U.S. and Europe, with the former still heavily reliant on Agency
RMBS, and the latter experiencing strong volume of buy-to-let issuance.

Comparative regulations (U.S., EU, UK,
Australia) and Their Impact on Investors and Issuers

The panel kicked off with a discussion regarding the differences in risk
retention regulations in the U.S. and the EU, centering on how
horizontal risk retention is treated in the two geographies. Of note,
the “L-shaped” structure seen in some U.S. transactions is not allowed
under EU regulation. The panelists moved on to discuss risk retention
specific to CLOs, noting the recently relaxed U.S. regulations and
discussing the need for dual-compliant CLOs if the intent is to market
the associated securities in both geographies. Of interest, Australia
has no explicit risk retention legislation, in part due to other
regulations that seek to ensure alignment of interest between issuers
and investors. The STS regulation was discussed at length, with the
panelists agreeing that the regulation’s homogeneity requirement, as
well as several others, has several issues that need to be resolved.
Recent changes to the U.S. Volcker Rule were also discussed, noting the
expected “lighter regulatory touch” under the current U.S.
administration. The panel concluded with a discussion on capital
treatment under Solvency II in the EU, with the panelists agreeing that,
overall, the regulatory environment in the EU towards securitisation is
hostile compared to the U.S. and Australia.

The End of Quantitative Easing: Weaning the
Patient off the Methadone

The day concluded with a discussion on how the less accommodative
central bank policy will impact the European structured finance market
moving forward. The panel noted that the phasing out of the ECB’s
Targeted Long-Term Refinancing Operations and Asset Purchase Programmes
over the next 24 months, as well as the end of the BoE’s Funding for
Lending Scheme (FLS) and Term Funding Scheme (TFS) earlier this year,
signals an end to an unprecedented era of expansionary monetary policy
in Europe.

Panelists pointed out that with the ECB and BoE providing cheap,
medium-term funding to the banking sector, activity in the European
structured finance market has been subdued for a number of years. The
economics of issuing residential mortgage-backed securities,
historically the largest European securitised asset class, simply
haven’t made sense for banks, given their ability to borrow from central
banks at or near the base rate. However, as these cheap sources of
capital become less readily available over the next few years, the panel
generally thought that banks would gradually return to the
securitisation market for their funding needs.